Transfer of estate assets can be complex. They can also incur taxes for your heirs, especially if the value of the assets are significant. This is especially true of residences here in Pittsburgh, where real estate prices have gone up quickly over the last two decades. Individuals who have more than one home can also encounter this when they look to leave real estate to their loved ones. This is why many people set up Qualified Personal Residence Trusts (QPRTs) for their homes and vacation properties. An experienced Pennsylvania estate planning attorney can help guide you through the process of setting up a QPRT so that you can gain the advantages of having this as part of your estate planning.
What is a Qualified Personal Residence Trust?
A QPRT is a specialized trust into which a person can transfer title to real property. It is an irrevocable trust, meaning that once assets are placed inside the trust, they cannot be removed. The types of property are fairly broad and encompass a person’s primary residence, any vacation homes, and any other residence used by such person for at least 14 days per year. Therefore, you cannot include rental properties or other income producing real property into a QPRT.
The person who creates a QPRT is called the grantor. This is the person who owns the property and lives there. Such a person will designate a trustee who will be in charge of the trust, as well as at least one replacement trustee who can take over if something happens that makes it impossible for the first trustee to continue in his or her position. The grantor will also designate beneficiaries, who are usually the same people as the potential heirs of the grantor in his or her estate planning. After setting up the QPRT, the grantor will continue to live in the home with the value of the home transferred to the trust over time. Upon the death of the grantor, the trust will distribute the interest in the home to the beneficiaries.
What are the benefits of a QPRT?
There are a number of benefits to setting up a QPRT, especially if you are a high net worth individual who owns an expensive home and/or has valuable vacation property. The primary benefit is to reduce the estate taxes that your relatives may be subject to if they were to inherit your residence. In fact, a QPRT can remove the value of your primary or secondary residence and any appreciation from the calculation of estate tax upon your death.
A QPRT can also help your beneficiaries avoid the time and expense associated with probate. Items in trusts like a QPRT are not subject to probate, so the residence can pass to your relatives more quickly. Meanwhile, you will get to continue the use and enjoyment of your residential properties while you are alive.
The final benefit of setting up a QPRT is to avoid gift taxes. If you plan to gift one or more properties to your relatives, you can do so through a QPRT. This will lock in the value of the property, which is important if it currently falls below the exemption limit but may appreciate to exceed this amount. The amount of time your beneficiaries have to wait before taking ownership will also be factored into the calculation of any gift tax.
What are the disadvantages of a QPRT?
As an irrevocable trust, you will no longer own the asset in your own name if you put it into a QPRT. So, once you have transferred your residence into a QPRT, you cannot sell, transfer or dispose of it in any way, shape or form without the approval of the trustee.
Once you set up a QPRT and transfer your residence into it, there is a time period during which the value of the property will be considered transferred to the trust. Therefore, if the grantor dies before the term expires, any value that has not been transferred will be factored into the calculation of estate taxes for your relatives who are designated as beneficiaries under the trust.
You may also run into some issues if your residence is subject to a mortgage. Any mortgage payments that are made on the property will be considered gifts that count against the gift tax exemption. Since the property is now owned by the trust, you cannot refinance the mortgage, get a second mortgage or use the property as collateral for a loan.
Contact Our Estate Planning Attorneys Now
QPRTs can help with your estate planning, but there are many issues and complexities with forming them that you need to consider. The experienced estate planning attorneys at Jones, Greg, Creehan & Gerace can provide you with the guidance you need to decide whether a QPRT is right for you, and the assistance in creating and maintaining one as part of your personal estate planning.